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December, 2007

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Higher Prices Slow The German Cigarette Export Boom

By John Parker

While the recent expansion of the EU free-trade areas did not have the impact of past expansions, Germany remains the cigarette exports leader of the world as it looks to solidify its dominance in Europe, and to grow into Asia.

Gains for German cigarette exports slowed down in early 2007. A major catalyst for expansion during recent years was the addition of ten new members to the European Union in 2004. It may be difficult to get a repeat of that unusual rise for cigarette exports to EU markets, but dramatic gains are sought in some countries in Asia. The entry of Romania and Bulgaria to the EU on January 1, 2007 brought the number of countries belonging to the EU free-trade area to 27. In contrast to the remarkable increase for German cigarette exports to Czech Republic, Hungary, and Poland during 2004–06, the entry of the two new members in 2007 did not result in greater sales to them. Exports to these two markets prior to entry had already lifted exports to a higher level, and their actual entry did not provide a boost for 2007 sales. In the first seven months of 2007, shipments to Bulgaria declined 38.9% to $14 mn. Exports to Romania declined nearly 90% to $3.8 mn.

Germany was the leading world exporter of cigarettes during 2005–07. Exports increased a fifth in 2005 to 146.7 bn pieces and advanced 2.4% further in 2006. The value for German cigarette exports increased 44.9% to $2.894 bn in 2005, but declined 1.3% in 2006 when stronger competition tilted management to provide some price reductions. Then prices increased in terms of US dollars in 2007 as the value of the euro increased against most other major currencies.

Gains for exports to some far away markets were dramatic in the recent year, including the way sales to Japan nearly doubled. Managers of multinationals with offices in Germany benefit from excellent research. Ample factual information on preferences by smokers in specified countries and prices provided by competitors helps export sales people to deal with some complex problems.

Earlier EU Members Remain Major Export Markets: The upward trend for German cigarette exports has had various stages in different market areas. First, exports to some major markets in the earlier European Union (EU 15) increased at a rapid pace during 2002–04, and then the pace of growth slowed down by 2005. The 14 other countries of the earlier EU 15 accounted for 63.9% of German cigarette exports in 2006, compared with 74.6% in 2004. The EU 57.6% ad valorem import duty for cigarettes coming from outside the EU gave Germany an advantage over previously significant suppliers like the United States.

Germany has remained the leading supplier of imported cigarettes for the previous EU 15, although the German share of total imports by some markets has drifted downward. This stemmed from rising exports of other EU members to those countries. Once Germany tended to push out non-EU competitors, they did not come back as suppliers of significant quantities of cigarettes to EU countries, even when their export prices declined. Apparently German cigarettes have advantages of quicker delivery at lower transportation cost than US suppliers.

Second, Germany made astronomical gains for cigarette shipments to some of the ten countries joining the EU in 2004. Astonishing growth in sales to some countries came forth in 2004. That was when cigarette exports to Hungary, Slovakia, Poland, Slovenia, and Latvia more than tripled. Further gains came forth in 2005 and 2006. By 2005, German cigarette exports to all of the ten countries entering the EU in 2004 were more than double the level they had been in 2003. Competition from other EU exporters taking advantage of the new market opportunity caused a dip for German cigarette exports to some of these countries in 2006.

Third, after innovative sales programs worked well to EU countries, German cigarette exporters promoted sales to many markets in the rest of the world. Far East markets accounted for most of the gain in quantity of cigarettes exports to markets beyond the EU in the last three years. Also, interesting gains were made to many smaller and newer markets in Latin America and Africa. Germany exports cigarettes to over 150 countries.

Far East Markets Bought More German Cigarettes In Early 2007: Remarkable growth for sales to Japan and Hong Kong bolstered German cigarette exports to the Far East in early 2007. Japan became the leading destination for exports of cigarettes beyond the EU in 2005. Taiwan and UAE were the two leading destinations for German cigarette exports beyond the EU in 2004. Following the rise of 35.6% to 10.2 bn pieces in calendar 2006, German cigarette exports to Japan were up 99.3% in the first seven months of 2007.

Taiwan was the 12th major export destination for German cigarettes in the first 7 months of 2007 with the shipment of 2.18 mn pieces. Taiwan imports over half of its cigarette supply, with about half of the imports coming from Japan. German cigarette exports to Taiwan reached a peak of 4.49 bn pieces in 2005, before declining a tenth in 2006. German cigarette exports to Hong Kong rose 45% in early 2007 to 369 mn pieces.

Exports To Middle East Increasing: United Arab Emirates (UAE) was the seventh major customer for German cigarette exports in January-July 2007, rising 61% to 3.2 bn pieces. Azerbaijan was the tenth major customer with purchases of 2.9 bn cigarettes, a gain of 43.2% over the comparable months of 2006. German cigarette exports to Saudi Arabia climbed 67% in the first seven months of 2007 to 759 mn pieces, following an increased of 59% in calendar 2006. German cigarette exports to Turkey were steady in the first 7 months of 2007 at 1.59 bn pieces, including some shipments for transit traders selling products to Iraq. German cigarette exports directly to Iraq reached 55 mn pieces in the first 7 months of 2007—ten times the shipments in the comparable months of 2006. Syria was a rapid growth market for German cigarettes in early 2007 with a 246% rise in exports to 182 mn pieces. German cigarettes to Qatar rose 31% in the first 7 months of 2007 to33 mn pieces.

Rebound Underway To Some CIS Markets: Some of the twelve countries of Commonwealth of Independent States (CIS) had been larger customers for German cigarettes before the building of modern factories in Russia and Ukraine by multinationals. The strong rebound for sales to Azerbaijan for German cigarettes occurred despite the duty-free trade through CIS, and rising sales by Russia and Ukraine. Some smokers in CIS countries like certain German brands, including those with 25 cigarettes per pack. German cigarettes to Ukraine increased 125% in the first 7 months of 2007 to 535 mn pieces, after rising a fourth in 2006.

Analysis Of Global Market Opportunities Advanced By Merger Of Some Multinationals: The merger of Imperial and Reemstra apparently made their combined marketing work very effective. It appears that their researchers have been able to identify potential new markets and explore prospects to increasing shipments to important importers in the Far East. The German share for cigarette imports into Japan, Hong Kong, and Singapore in 2006 was far above the 2003 level. New markets were opened in 2005 for German cigarette exports to some countries in Latin America, including Argentina, Chile, and Bolivia.

Germany Is Located Favorably For Cigarette Exports To EU Members: Potential importers of cigarettes in some EU countries can take advantage of inexpensive flights offered by Air Berlin to go visit the places where purchases can be arranged. For example, at certain times a flight from Helsinki to Berlin can be purchased for only $39. Berlin’s humming factory output of cigarettes is now at a convenient location for expanding shipments to customers in the EU and East Europe. A trip for cigarette buyers from Helsinki or Warsaw to Richmond, Virginia would be in the range of $1,000, compared with the low price for a flight to Berlin.

Total imports by the New EU 10 nearly doubled in 2004, and the share of their imports coming from Germany was up. Some of the New EU 10 developed a greater two-way trade in cigarettes. While their imports from Germany were rising, they expanded exports to other countries, especially those in the Balkans still outside the EU, and to certain Middle East and Far East markets.

German cigarette exports to the new EU ten and many markets beyond Europe have done very well, while exports to most of those markets from the Netherlands were not near the quantity coming out of Germany. Dutch cigarette exports averaged about $2.5 bn annually during 2001–03, and rose to a peak of $2.9 bn in 2004. German cigarette exports rose from $1.757 bn in 2003 to $2 bn in 2004. Greater shipments of brands of long cigarettes meant the quantity of shipments from Germany in 2004 was 122.bn pieces—a substantial gain over the average of about 105 bn pieces annually during 2001–03 by the Netherlands in 2004.

Increased Focus Upon Opportunities In East Europe Evident: Germany’s cigarette manufacturers faced more competition for sales in France and Spain in the last two years. That may have contributed to the increased focus upon expanding sales in East Europe in 2004 and 2005. The elimination of prior duties and barriers among new EU members opened appealing opportunities.

It is interesting to observe the trend for German cigarette exports to specific countries. Duty-free exports to other members of the European Union give Germany a great advantage for cigarette exports. Strong competitors like the Netherlands, UK, Denmark, and some other important exporters within the EU enjoy that same advantage. Germany’s location and convenient marketing facilities assist cigarette exports to most of the new EU 10.

The 57.6% import duty for suppliers from outside the European Union tends to limit competition from cigarettes made in the United States, which were a trade worth about $1 bn annually a decade ago. Widespread use of the euro and its strength against the US dollar made trade arrangements for German cigarette exporters to most European markets easier.

Multinationals dominate the manufacture of cigarettes in Germany. Philip Morris accounted for about 37% of the cigarette market in Germany during 2004–07, compared with an estimated 41% during 2000–03. BAT had about 24% of the market in the last three years. Imperial Tobacco through the purchase of Reemstra accounted for about 23% of output. The share of output for Japan Tobacco International has declined to a range of 4%.

German Cigarette Exports Bolstered By European Union Trade Setting: Customers in the 26 other countries of the European Union have a number of reasons to buy German cigarettes. About 394 brands of cigarettes are manufactured in Germany, included most of the leading American blend brands produced by multinationals. Avoiding the 57.6% import duty for cigarettes imported from suppliers outside the EU, tends to cause importers in many of these countries to buy from German manufacturers. Also, use of the euro as the valued currency of most EU members adds to the appeal for buying cigarettes from Germany. This means no bank conversion fees are computed on the purchases. The addition of ten new members in 2004 pushed the share of German cigarette exports going to the European Union higher in 2005.

Spain Remains The Leading Destination For German Cigarette Exports: German cigarette exports to Spain rose to nearly 37 bn pieces in 2005, valued at $925.6 mn, and they accounted for about three-fourths of the 46 bn cigarettes imported into Spain. Spanish smokers greatly increased purchases of imported German cigarettes from the late 1990s through 2005. Then, German cigarette exports to Spain declined 2.2% to 36.2 bn pieces in 2006. A rebound of 5% came forth for German cigarette exports to Spain in the first 7 months of 2007. Despite progress with arrangements to improve the quality of cigarettes manufactured in Spain, demand for German cigarettes remained strong. Greater output of high quality blended brands of cigarettes by Altadis and some other manufacturers in Spain caused total cigarette imports into Spain to flatten out during 2004–07, following dramatic gains during the previous decade.

Italy Remained The Second Major World Cigarette Importer In 2006: German cigarette exports to Italy peaked at 19.9 bn pieces in 2006, a gain of 6.8% over 2005. Total imports of cigarettes from all countries into Italy averaged about 73 bn pieces during 2004–07, compared with about 58 bn in 2003. Italy is a competitive market where about half the cigarettes sold are imported. German cigarette exports to Italy face competition from Netherlands, France, Belgium and Austria. Poland and Greece recently advanced cigarette sales to Italian traders.

French Purchases Down: France had been a customer for 8.9 bn German cigarettes in 2003, before shipments fell to a low of 7.2 bn pieces in 2005. Then a rebound of 5.5% to about 7.6 bn pieces occurred in 2006, before the 8% setback in early 2007. Improved marketing activities of Altadis contributed to a decline for cigarette imports into France from a peak of about 65 bn pieces in 2001 to approximately 47 bn pieces in 2005. France was the third leading customer for German cigarette exports during 2003–05, but it fell back to fifth place in early 2007, as Japan and Greece moved up to third and fourth place.

German Cigarettes To The Netherlands Rebounded In Early 2007: German cigarette exports to the Netherlands declined from a peak of 7.07 bn pieces in 2003 to 5.1 bn pieces in 2006. Then, shipments rebounded a fifth to 4.05 bn pieces in January-June 2007, over the comparable months of 2006. Cigarettes manufactured in the Netherlands are usually more costly than a number of brands delivered from Germany. The Netherlands imports most of the cigarettes purchased by smokers at convenient markets in grocery stores, tobacco shops, and stores located at places where petroleum is sold.

Greece Is A Growing Market: Greece had an upward trend in the last five years for both cigarette exports and imports. Exports go mostly to Balkan countries, the Middle East, and Africa. Imports arrive mostly from Germany, Netherlands, UK, and Denmark to provide brands some smokers prefer. German cigarette exports to Greece increased a fifth in 2006 to 7.9 bn pieces, followed by a rise of 5% in early 2007.

Belgium’s Total Cigarette Imports Appear To Have Stabilized: German exports of cigarettes to Belgium increased 13.3% in 2006 to 4.85 bn pieces, compared with 4.28 bn pieces in 2005. Shipments to Belgium were up slightly in early 2007. Belgium’s total cigarette imports remained steady at about 15 bn pieces annually. Most of the transit trade through Antwerp was not counted in Belgium’s official trade data. Belgium’s transit trade in imported cigarettes has dwindled to only a small part of what was happening in the 1990s, when large deliveries came from the United States. Philip Morris has arranged to provide large sums of money for EU members to combat smuggling.

Austria Was The Fastest Growing EU Customer For German Cigarette Exports In Early 2007: Exports of cigarettes from Germany to Austria increased 68.7% during January-July 2007 to nearly 3 bn pieces, compared with the comparable months of 2006. This followed the rise of a fifth to 3.1 bn pieces in calendar 2006. Austria’s total cigarette imports nearly doubled between 2003 and 2006, rising to about 6 bn pieces. Austria also had dramatic gains for cigarette exports in the last three years, especially to Hungary and Romania.

Shipments To Portugal Down In Early 2007, After A Surge In 2006: German cigarettes exports to Portugal soared 93.5% to 2.2 bn pieces in 2006, but shipments dived 60.3% in early 2007 as inventory of the large 2006 arrivals was worked down. Portugal has made significant progress in the quality of cigarettes produced by its factories in recent years.

Unusual Sales To Finland Apparently Influenced By Attractive Prices For Traveling Shoppers: Finland’s fascinating business related to the inexpensive boat trips to Estonia and special rates for airfare to Germany appear to have contributed to gains for German cigarette sales in this market. German cigarette exports advanced from 815 mn pieces in 2003 to 3.3 bn pieces in 2004 and peaked a 3.59 bn pieces in 2005, before drifting down 16% to 3 bn pieces in 2006. Finland recently became a much busier center for transit traders and the distribution of goods on their way to Russia and the Baltic countries. The high level of shipments during 2004–06 indicated that most of the German cigarettes were being sold outside the borders of Finland, apparently in boats and the flourishing tourist centers of Estonia, Latvia and some other countries bordering the Baltic Sea. German cigarette exports to Finland declined 44.9% during the first 7 months of 2007 to 1.03 bn pieces, as competition from other EU suppliers intensified. The average retail price for cigarettes in Finland rose to about $6 per pack of 20 by early 2007. This still was about double the price in Estonia. A decade ago, shoppers could buy Marlboro cigarettes in Estonia for about $1 per pack, or $10 per carton, compared with a range of $30 per carton in the summer of 2007.

Danish Buying Fewer German Cigarettes: German cigarette exports to Denmark reached 1.05 bn pieces in 2005 – more than double the 496 mn pieces shipped in 2003, but they declined 27% in 2006 to 767 mn pieces. Prices for many German brands are less than those certain brands in the Danish market. Denmark has excellent quality cigarettes containing a high proportion of US leaf tobacco.

Sales To Sweden Up In 2006 And Early 2007: German shipments of cigarettes to Sweden reached 526 mn pieces in 2006—more than double the 2003 level. Shipments to Sweden were a fourth higher in early 2007. Cigarette prices went so high several years ago in Sweden, that taxes were reduced to allow a drop in retail prices to decline from levels once surpassing $7 per pack of 20.

Dramatic Gains Occurred For New EU Members In East Europe During 2004 And 2005: A combination of factors contributed to the surprisingly rapid increase for total cigarette imports into ten countries combined entering the EU in 2004 to approximately 31 bn pieces, compared with about 20 bn in 2003. Total recorded cigarette imports by Czech Republic, Poland, Hungary, and Slovenia more than doubled in 2004. Changes in the transit trade for cigarettes moving through Cyprus and Malta to other countries caused their cigarette imports to decline in 2004.

Czech Republic Expanded Purchases Of German Cigarettes Through 2005, Before 2006 Reduction: Czech Republic was a sensational market for German cigarettes in 2005 when shipments reached 4.85 bn pieces—about triple the 2003 level, before falling 17% in 2006, and another 40% in early 2007. Competition from Austria and Poland has trimmed the earlier German share of the Czech market for imported cigarettes from the peak of 70% in 2005. Czech Republic has been able to sharply expand exports of cigarettes made in modern factories near Prague, particularly to Romania and Slovakia.

Boom For Sales To Hungary Through 2005 Fizzled By 2006: Exports of cigarettes from Germany to Hungary increased to a peak of 2 bn pieces in 2005, compared with 299 mn pieces in 2003, and then fell by two-thirds to 667 mn pieces in 2006, followed by another reduction of a fifth in early 2007. Total imports of cigarettes by Hungary rose to about 3 bn pieces in 2005—up from 474 mn pieces in 2003. Closing of a cigarette factory in Hungary with over 350 employees apparently contributed to the big jump in imports during 2004 and 2005. Hungarian cigarette manufacturers have imported some US tobacco for blending recently to provide premium brands from large factories.

Latvian Purchases Declined In 2006: German exports of cigarettes to Latvia reached a peak of 1.3 bn pieces in 2005, before declining by half in 2006 and remaining flat in early 2007. The pace for German cigarettes to Latvia advanced at a rapid pace in 2004 to a level nearly double that for 2003. Latvia’s total cigarette imports increased about 40% to approximately 4.8 bn pieces in 2004.

Estonian Demand Bolstered By Tourist Business: Direct exports of German cigarettes to Estonia declined 29.9% in the first 7 months of 2007 to 92 mn pieces, or about half the level recorded in the comparable months of 2005. Shipments from Germany to Estonia increased from 122 mn pieces in 2003 to 298 mn pieces by 2005, valued at $4.1 mn. Yet, this is only part of the story of the fascinating Estonian market. A large share of the unusual German cigarette exports to Finland in 2004 and again in 2005 apparently was destined for warehouse firms serving the thriving Estonian market. Estonia has been called the free trade dream country. Most imports had entered duty-free for about a decade. Some value-added taxes will eventually make the retail price for cigarettes in Estonia higher than recent levels. Retail prices for cigarettes in Estonia in recent years were usually less than half the retail price in Finland.

Lithuanian Purchases Of German Cigarettes Drifted Downward After 2005 Peak: German cigarette exports to Lithuania reached a peak of 743 mn pieces, compared with 280 mn pieces in 2003. German deliveries accounted for about a fourth of the 1.27 bn pieces imported into Lithuania during 2004, and about half of the imports in 2005. Lithuania increased cigarette output and exports in the last three years. German cigarette exports to Lithuania declined 14% in 2006, and fell by 58% in early 2007.

Sharp Decline For German Cigarette Exports To Slovenia Recorded In 2006: Among the new EU members joining in 2004, Slovenia turned out to be one of the spectacular growth markets for German cigarettes in 2004 with the purchase of 2.3 bn pieces in 2004 and 2.8 bn pieces in 2005. Then came the 67.2% decline to 917 mn pieces in 2006, followed by a slight rebound in early 2007

Poland’s Customs Report Changing Cigarette Trade: Poland’s reported purchases of German cigarettes reached a peak of 1.2 bn pieces in 2005, before declining 36% in 2006, and moving downward another tenth in early 2007. Poland had been one of the unknown markets for an outcome when it joined the EU in 2004. As that distribution outlet nearly blinked out, Polish smokers searched for more cigarettes delivered from Denmark and Germany. Some of the German cigarettes smoked in Poland may come from suitcase traders and travelers to German cities near the border, especially Berlin. In the last two years more Germans have crossed the relatively open border to go buy cigarettes in Poland for less than half the average price of about $6 per pack back home.

Cyprus Builds New Cigarette Marketing Arrangements: German cigarette exports to Cyprus increased 3% to 544 mn pieces in 2006, but declined 21.3% in early 2007. Some other EU countries have expanded cigarette exports to Cyprus. Greece and Austria have found more customers in Cyprus recently. Cyprus strived to bolster domestic cigarette output prior to joining the EU in 2004, and most of the previously important transit trade in US cigarettes blinked out.

Romania And Bulgaria Began Buying More German Cigarettes Before Entering EU: Romania and Bulgaria joined the EU on January 1, 2007, but traders had already arranged distribution of specified brands earlier. Romania was a rapid growth market for German cigarettes in 2005, but shipments plummeted in 2006 as competition intensified. Austria and Poland became larger suppliers of Romania’s imports. Intense competition from Greece caused German cigarette exports to Bulgaria to decline sharply in early 2007.

German Cigarette Imports Clearing Customs Were Steady In Early 2007: During January-July 2007, Germany reported imports of 13.7 bn cigarettes, valued at $204.8 mn. The quantity was virtually the same as the comparable months of 2006, but the value was down a tenth because of lower prices. During the first seven months of 2007, Austria was the leading supplier of German cigarette imports with the delivery of 7.1 bn pieces, valued at $47.3 mn. Luxembourg delivered 2.3 bn pieces—8.7% more than during the comparable months of 2006.

Reported imports of cigarettes from Poland into Germany increased 89.7% in the first 7 months of 2007 to 1.06 bn pieces, valued at $22.9 mn. Arrivals of UK cigarettes in Germany in early 2007 rose 8% to 783 mn pieces. Deliveries from Denmark declined nearly a third to 336 mn pieces.

German imports of cigarettes from the Netherlands declined sharply from 2.386 bn pieces in January–July 2005 to only 457 mn pieces in the comparable months of 2007. Arrivals from Belgium in early 2007 were only a fifth the peak level of 1.07 bn pieces recorded in the first seven months of 2006. Germany’s imports of cigarettes from Greece made a sharp rise of 820% in the first 7 months of 2007 to 82 mn pieces.

Anti-Smoking Measures Tend To Push Consumption Downward: Estimates for cigarette consumption based on output and net trade indicate that total sales drifted downward in the last twelve years from about 152 bn pieces annually to a range of 102 bn. It is difficult to get a proper count on purchases of cigarettes by German shoppers when they travel over the border into Poland, Czech Republic, Austria, Netherlands, or Switzerland. Most of their purchases are where major brands produced by multinationals are a much lower price than at retail outlets in Germany. It has been estimated that the German excise tax was possibly not paid for over 18% of the cigarettes smoked in Germany.

Berlin and Dresden have remained the important centers for cigarette manufacturing. Some residents of Berlin remember the role of cigarette manufacturers in providing jobs at times in the past when political tension created by some people in Moscow left the city with a struggling economy. Berlin is now bustling with new employment as the capital of Germany, plus many service jobs. Tourism is up sharply and unemployment is down. Reduced unemployment might be a factor behind the flatness for cigarette sales in Germany in the last three years following a substantial downward trend for the prior decade. Also, the way taxes were raised on cut tobacco may have slowed the earlier shift from factory made cigarettes to roll-your-own cigarettes.

Upward Movement For Prices Might Slow Growth For Future Exports: The average prices for German cigarette exports increased a fourth during the first seven months of 2007 to an estimated 43 cents per pack, or about 2 cents for each regular size cigarette. It is interesting to observe the wide variation for the export price to specified countries. The average price to the competitive Dutch market in early 2007 was 31 cents per pack, compared with 73 cents per pack to Denmark. The 23% increase for exports to Spain to 39 cents per pack may tend to slow the pace of growth in the leading destination for export sales.

The average price for German cigarette exports to Japan increased 8% to 29.6 cents per pack in early 2007, while the price for shipments to UAE fell a fifth to 28 cents per pack. The rising value of the euro is likely to make the price for German cigarette exports in Japan and the Middle East less attractive. Yet, the rising value of the euro will have less of an impact for importers in the ten other EU countries where it is also the official currency. The average price for German cigarette exports to the United States declined 1.7% to 69.4 cents per pack of 20 in the first seven months of 2007.


Tobacco International - December, 2007

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